Orange County is the sixth riskiest major housing market in the nation.

Or so says fresh rankings from one major player in the mortgage game. And, believe it or not, this ranking is a noteworthy improvement.

PMI Group, the mortgage insurer, just revamped its housing risk metrics that are based on local pricing trends and regional economics. When you're like PMI, and you're in the business of protecting lenders and mortgage investors from themselves, you'd better be up-to-date on what's happening in housing markets.

Under the old formula, last used six months ago, PMI had Orange County pegged as the second riskiest housing market among the nation's top 50, just behind San Diego. So No. 6 with the new math - behind the Inland Empire, Phoenix, Las Vegas, West Palm Beach, Fla., and Los Angeles - is a bit of progress. And let's remember, too, that housing risk is a measure of possibility, by no means a guarantee that disaster lies ahead.

Mark Milner, PMI's head risk tabulator, says Orange County is challenged with an expensive, volatile housing market that's seen a dramatic drop in home appreciation.

"The good news is that unemployment is very low," Milner says. "That's good support to the market."

This kind of mixed signal puzzles economists at UCLA, who Tuesday issued their latest statewide forecast. Their outlook suggests an overall California sluggishness for the remainder of 2007 that continues throughout 2008. As the professors put it, "in spite of all this bad news from real estate, the wider California economy is mostly unfazed."

THE NEW MATH

PMI's rejiggered take on risk basically weighs a region's recent home-price performance, affordability of housing in a specific area, and local unemployment rates. Tracking the volatility of that price performance - the latitude of the ups and downs - was the driver within the new math.

PMI's research suggests that the greater the historical price fluctuations in a market, essentially, the larger the chance for price drops. It sort of a "no pain, no gain" logic because for a market to be volatile, it's got to go up pretty frequently.

Look at Pittsburgh, for a moment, where I lived for seven years. This is a city with the second lowest volatility among the 50 large markets tracked by PMI - right behind Cincinnati. It's also a town where the phrase "real estate riches" is rarely uttered.

Veteran Orange County housing watchers, people who've ridden out previous bouts of intense price fluctuations, may be amused by PMI's math. It finds that there are 12 other major markets in this country that have suffered more price volatility than here. And that fact helped push us down the risk rankings.

Let's be honest. Any volatility measure is a chunk of serious statistical gymnastics that will befuddle all but the geekiest of math wizards. But think of it this simple way: How might everyday people feel when the value of one of their largest assets acts like a ping-pong ball?

When prices are soaring, as they did in many markets for much of this decade - until recently - real estate's a simple game.

"Such high appreciation, it bailed out all problems," says Milner of risky house bets made by buyers and lenders alike.

But home gains for the immediate future are now forecast, at best, as meager. Milner warns: "Appreciation isn't going to bail you out ... It's a time for prudence"

THE DOLDRUMS

It sounds like a chicken and egg proposition. As long as a region's overall economy is healthy, the local housing market should do O.K.

And vice versa?

Housing in towns like Orange County - even for a state like California where six of PMI's 10 riskiest markets sit - is a healthy hunk of the business scene.

California real estate isn't just suffering from disappearing home gains. The diminishing opportunities for what Milner portrayed as bailout-by-appreciation has led to a statewide wave of late mortgages payments and eventually foreclosures. Slashed expectations of real estate wealth have dramatically dampened buying activity, too. That slowdown's promoted builders to rein in their community development plans.

Yet broader, negative economic impacts are hard to find to date.

UCLA researchers eyeballed 44 years of construction data to learn that it can take up to three years for construction employment to drop following house-market stagnation like we're suffering. By UCLA's math, assuming that builder's requests to construct new homes peaked in 2004, the true pain of the housing slowdown on the business climate - while late to show - is coming. It may last throughout 2008.

"We think it will be some time before the economy is able to work through the real estate doldrums," UCLA's forecast says, "and even longer before we see a normal housing market again."

Housing's risks are more than just how much you can make on real estate bets. An entire economy watches, fingers crossed, to see if home prices can beat the odds.

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